Aug. 30 (Bloomberg) -- AuRico Gold Inc. is paying the
cheapest valuation for a takeover of a North American gold
producer in seven years even as bullion trades at a record.

The Halifax, Nova Scotia-based company that mines the
precious metal in Mexico agreed yesterday to buy Northgate
Minerals Corp. of Vancouver for C$1.28 billion ($1.31 billion)
in stock to add production in Canada and Australia. Including
net cash, AuRico’s acquisition valued Northgate at 14.7 times
earnings before interest, taxes, depreciation and amortization,
the lowest since 2004 for a North American deal worth more than
$1 billion, according to data compiled by Bloomberg.

AuRico is paying about 64 percent less per dollar of
earnings than Canadian rival Kinross Gold Corp. did for Red Back
Mining Inc. a year ago, even after gold surged to a high of
$1,913.50 an ounce last week. While bullion has climbed 26
percent in 2011, the Market Vectors Gold Miners exchange-traded
fund tracking producers of the metal is little changed, data
compiled by Bloomberg show. The gap in performance may spur more
deals like AuRico’s purchase even if gold prices drop, according
to Octavian Advisors LP and Caldwell Securities Ltd.

“This has moved into an extreme, and one of the things
that should actually correct this in our view is M&A,” Richard
Hurowitz, chief executive officer of New York-based Octavian,
which oversees about $1 billion, said in a telephone interview.
“If the market is going to trade gold stocks at a major
discount, that’s a great opportunity for larger gold companies
to buy up a smaller one because all of their potential targets
are massively undervalued.”

Primero Deal Scrapped

Northgate’s shares climbed 28 percent to C$3.98 in Toronto
yesterday, closing within 7 cents of AuRico’s offer. AuRico,
formerly known as Gammon Gold Inc., retreated 19 percent to
C$11.09, as merger arbitragers narrowed the spread between the
companies’ share prices for the all-stock deal and the agreement
derailed speculation that AuRico itself was a takeover target,
according to Alfredo Scialabba, a special situations analyst at
GFI Group Inc. in New York.

Investors in Northgate will get 0.365 shares of AuRico for
each Northgate stock, AuRico said in a statement yesterday. As
part of the deal, Northgate is scrapping its July accord to buy
Primero Mining Corp. and will pay a C$25 million termination
fee, Vancouver-based Primero said in a separate statement.

Relative Value

Northgate produces gold at mines in British Columbia and
Victoria in Australia. Combining with AuRico will create a
company with five operating gold mines, another that’s planned
to start production next year and three projects that are in
development. The combined company’s production will increase
from about 475,000 so-called “gold equivalent” ounces this
year to 730,000 ounces in 2013, AuRico said.

AuRico’s offer represents a 46 percent premium based on the
companies’ trading average in the previous 20 days, according to
data compiled by Bloomberg. That’s the highest for any gold
mining deal since Goldcorp Inc. offered a 56 percent premium
last September to buy Andean Resources Ltd., the data show.

The size of the premium offered by AuRico may have
contributed to the drop in its shares, said Barry Allan, senior
mining analyst at Mackie Research Capital Corp. in Toronto.

“Anytime you get a company that offers such a premium, you
go long the company being taken over and short the company who
makes the offer,” he said in a telephone interview.

Even with the premium, the deal values Northgate at 14.7
times its Ebitda of $89.6 million for the past 12 months. That
would make it the cheapest takeover of a gold producer in North
America since Vancouver-based Goldcorp offered to buy Wheaton
River Minerals Ltd. for 8.7 times Ebitda in December 2004.

‘Compelling’

In last year’s biggest North American gold takeover,
Toronto-based Kinross, Canada’s third-largest producer of the
metal, paid 40.4 times Ebitda to acquire Red Back Mining of
Vancouver in a $6.7 billion deal.

“The valuation is compelling,” said Sachin Shah, a merger
arbitrage strategist at Tullett Prebon Plc in Jersey City, New
Jersey. “If you’re betting on gold prices remaining at current
levels, this deal is a winner for AuRico.”

Gold for immediate delivery closed at $1,788.43 yesterday,
after touching a record of $1,913.50 on Aug. 23. While concern
that the U.S. economic slowdown and Europe’s debt crisis will
worsen has driven demand for gold as a haven asset, spurring a
gain of as much as 35 percent, the Market Vectors ETF of gold
miners has only advanced 0.8 percent in 2011.

‘Well and Truly’

Northgate had slipped 2.5 percent this year before
yesterday’s deal. Toronto-based Barrick Gold Corp., the world’s
largest producer of the metal, has slid 7.8 percent in 2011,
while Kinross has retreated 10 percent in Toronto trading.

Shares of gold companies “have well and truly
underperformed the gold price,” Richard Hall, Northgate’s chief
executive officer, said in a telephone interview yesterday. Even
the biggest producers “are coming down relative to what they
were six to eight months ago,” he said.

Bets by equity investors that bullion’s current rally is
unsustainable may have weighed on gold stocks, according to Rick
de los Reyes, a manager at T. Rowe Price Group Inc., which
oversees about $510 billion.

Gold will retreat 16 percent from yesterday’s close to
$1,510 an ounce next year, according to the average of analysts’
estimates compiled by Bloomberg. Bullion will decline another
8.9 percent to $1,376 in 2013, the projections show.

‘In a Bubble’

“Ultimately, people think gold can’t go up forever,”
Baltimore-based de los Reyes said in a telephone interview. “As
the price goes higher, you’re going to be less willing to price
it in because you think it’s in a bubble.”

While Thomas Caldwell, chief executive officer of Toronto-based Caldwell Securities Ltd., says that bullion may have
already peaked, the relative underperformance of gold stocks
means that AuRico’s purchase may make sense even if the metal
drops by $300 an ounce, he said.

“Bullion itself may have a pullback here and it could be
pretty brutal,” Caldwell, whose firm oversees about C$1 billion,
said in a telephone interview. “That does not necessarily mean
that this is a bad deal. The stocks are not quite as vulnerable,
and they have not built in these high prices. That’s why it
makes more sense for companies to take over each other.”